Title
General Fund 2023-24 Preliminary Budget Status and Five-Year Forecast
Description
This report transmits the preliminary status for the General Fund (GF) Fiscal Year (FY) 2023-24 budget and a five-year GF forecast through FY 2027-28 (Attachment A). The five-year forecast is being presented to the Mayor and City Council for the 13th consecutive year and provides an essential tool in long-term budget discussions and decision making.
THIS ITEM IS FOR INFORMATION AND DISCUSSION.
Report
Summary
The GF budget outlook for FY 2023-24 reflects a projected surplus of $134 million, and is good news as we move forward with developing a proposed Trial Budget for next fiscal year. The surplus is a reflection of responsible decision making by the City Council and a strong local and state economy. The projected GF surplus includes an estimated $69 million in ongoing resources and $65 million in one-time funds primarily due to: strong revenue growth impacted by high inflation, significant vacancy savings due to the competitive labor market, and the carry-forward of fund balances including unspent contingency reserves as presented in the FY 2021-22 Year-End General Fund Budget Results on Sept. 27. These resources could be used for employee compensation increases and to provide new or expanded programs and services for the community. Staff will be updating revenue and expenditure estimates in the coming weeks, and will bring back revised estimates and recommendations on responsible cost additions using the combination of one-time and ongoing projected resources on March 28 with the City Manager's Trial Budget.
The attached Five-Year Forecast report includes estimates of future GF resources and expenditures for FY 2023-24 through FY 2027-28 based on several economic and budgetary assumptions. The forecast is not intended to precisely predict future GF capacity, but rather to present ranges of potential ending fund balances to be used as a framework for decision making and strategic budget planning.
General Fund 2023-24 Preliminary Status
The preliminary FY 2023-24 GF budget status reflects a surplus of $134 million, and as mentioned above includes an estimated $69 million in ongoing and $65 million in one-time resources available for spending initiatives. It is important to note significant economic uncertainty and volatility exists for 2023, which makes forecasting revenues very challenging. Additionally, several proposed State legislative bills would negatively impact ongoing revenues if passed and both of these variables present risks to the forecast. More information on economic assumptions and risks to the forecast are detailed in Attachment A. This uncertainty calls for a cautious approach to forecasting future revenues and careful consideration of new spending initiatives to ensure that the City can sustain a balanced budget in the future.
The GF preliminary estimated resources in FY 2023-24 are expected to increase 10.1 percent to $2.015 billion from the FY 2022-23 estimate. GF revenue is estimated to increase 10.2 percent in FY 2023-24 and is largely due to growth from known state shared income tax revenues, which are based on collections from FY 2021-22. The State increased the percentage share of individual and corporate income tax collections with cities and towns from 15 percent to 18 percent effective in FY 2023-24, to offset impacts from reducing the individual income tax rate, causing an increase of 41.4 percent from FY 2022-23. Staff will further refine GF revenue estimates over the coming weeks in preparation for the City Manager's Trial Budget scheduled to be presented to City Council on March 28, and more information on each resource category is detailed in Attachment A.
The GF preliminary expenditure projections may change as cost estimates are further refined in the coming weeks; however at this time the preliminary FY 2023-24 GF expenditures to continue existing levels of service are projected to be $1.881 billion. This compares to the adopted FY 2022-23 GF expenditure budget of $1.779 billion, or an increase of $102 million. The increase accounts primarily for higher costs associated with employee salaries and fringe benefits including health insurance and pension, increased costs for vehicle replacements and Fire apparatus, cost increases in capital equipment and expected pay-as-you-go projects, and higher contingency amounts. Inflation has also dramatically impacted several expenditure categories including commodities and contractuals such as fuel, compressed natural gas, electricity, motor vehicle parts, plumbing supplies, custodial and security services, machinery and equipment repair, and facility maintenance costs.
For FY 2023-24, the City's combined GF civilian pension plan, the City of Phoenix Employees Retirement System (COPERS), and the City's sworn pension plan the Public Safety Personnel Retirement System (PSPRS), pension costs are expected to increase by approximately $45 million as compared to the FY 2022-23 budget. PSPRS pension costs account for approximately $40 million of the total increase, and COPERS pension costs account for $5 million of the increase. Over the forecast horizon from the current fiscal year through FY 2027-28, total GF employee pension costs are forecasted to increase $99 million.
The FY 2023-24 preliminary GF budget includes capital pay-as-you-go projects totaling $118 million primarily for funding information technology projects, including funds to procure a new time and labor management system and a new Municipal Court case management system. Funding is also earmarked to build a new Fire station located at 19th Avenue and Chandler Boulevard, perform necessary facility maintenance on aging City facilities, allocations for future infrastructure bill projects requiring City matching funds and General Obligation (GO) Bond projects that could require additional funds to complete, if approved by voters in the Nov. 2023 election. Additionally, funding for vehicle replacements has increased from $25 million to $33 million in FY 2023-24, to reduce the backlog of GF units currently valued at $144 million, and will be used primarily to procure critical Fire apparatus and other public safety vehicles.
The FY 2023-24 preliminary GF budget also accounts for increasing the contingency fund from $68 million to $76 million, to reflect 4.5 percent of operating expenditures. It is increased by 0.25 percent over the five-year forecast period to achieve five percent of ongoing operating expenditures in FY 2026-27. In March 2010, the City Council agreed to gradually increase the contingency with a goal of achieving five percent of GF operating expenses. Achieving this goal will improve the City’s ability to withstand potential future economic declines.
General Fund Five-Year Forecast
The attached Five-Year Forecast and Preliminary GF Status Report (Attachment A) includes economic, resource and expenditure assumptions used to develop the multi-year forecast. The report also includes possible risks and potential unfunded needs. The current forecast assumes no changes to existing labor contracts or service levels, and does not assume any increased ongoing operating cost impacts for new facilities or capital projects from a potential GO Bond Program. It does, however, assume any surplus is incorporated into the subsequent years' expenditures, whether in increased one-time and ongoing costs for added programs and services, labor increases, set-asides, or other uses of the funds. The forecast also assumes any deficit is resolved by reducing expenses in order to achieve a balanced budget. The current labor contracts expire at the end of FY 2022-23 and contract negotiations are underway. The City is also currently working with a consultant on a classification and compensation study, which is expected to result in increased costs to ensure the City can attract and retain employees. Estimated cost impacts from the study have been incorporated into the expenditure forecast.
The five-year forecast as presented includes a baseline, optimistic and pessimistic projection, based on ranges for revenues and expenditures. The model illustrates how the GF baseline (midpoint) forecast reflects a potential surplus in FY 2024-25 of $9 million, a possible $9 million deficit in FY 2025-26 and surpluses in FY 2026-27 and FY 2027-28 of $22 million and $47 million, respectively. As we look ahead, areas which could impact the GF include revenue volatility, continued pension cost increases, higher costs for employee compensation, impacts from State legislative actions, and unfunded mandates. Additionally, if a recession were to occur in 2023, or legislation is passed that would dramatically reduce revenues, it's possible that deficits could occur in the future requiring strategic budget balancing actions by the City Council. This report also includes stress testing of the forecast, which has been done for the fifth consecutive year, to model the potential for a recession beginning in FY 2023-24 and lasting until FY 2025-26 of the forecast. The alternative models provide an opportunity to evaluate how declines in revenue could affect the GF's ending balance.
Next Steps and Community Input
The Phoenix City Charter requires a balanced budget each year. On March 28, a balanced City Manager’s Trial Budget will be presented for City Council and community discussion along with the Preliminary Five-Year Capital Improvement Program (CIP). The CIP is a multi-year plan for capital expenditures that are needed to replace, expand, and improve infrastructure and systems.
Engaging residents in the budget process is a priority of the City Council, and this year staff plans to continue the practice of seeking community input on the proposed budget with several opportunities for residents to participate through community budget hearings to be held throughout the month of April. In addition, staff will make available to all residents the budget balancing tool, FundPHX, which will include the proposed City Manager's Trial Budget. Residents are also welcome to contact the Budget and Research Department directly to provide input or ask questions about the budget. Contact information is available on the Budget and Research Department's website, phoenix.gov/budget. Feedback received from residents will be provided to the City Council regularly as staff progresses through the budget adoption process.
Department
Responsible Department
This item is submitted by City Manager Jeffrey Barton and the Budget and Research Department.